Report to the Audit and Standards Committee HARLOW COUNCIL

Report to the Audit and Standards Committee

HARLOW COUNCIL

Audit Planning: year ending 31 March 2019

CONTENTS

1 Introduction 3

Welcome 3

2 Executive summary 4

Scope and materiality 4

Audit strategy 5

Audit risk overview 6

Independence and fees 7

3 Audit scope and objectives 8

Overview 8

Audit scope entities, components and audit risks 9

Audit timeline 10

BDO team 11

4 Audit risks – Financial statements 12

Overview 12

Management override of controls 13

Revenue (and Expenditure) recognition 14

Property, Plant & Equipment and investment property valuation 15

Pension liability valuation 16

HTS Pension Costs and liability Treatment 17

5 Audit risks – Other matters 18

Other matters requiring further discussion 18

Changes to accounting standards 19

IT general controls 20

6 Independence 21

Independence 21

7 Fees 22

Summary 22

8 Appendices contents 23

3 | BDO LLPHarlow Council - Audit planning report for the year ending 31 March 2019

We have pleasure in presenting our Audit Planning Report to the Audit andStandards Committee of Harlow Council (the ‘Council’). This report forms akey part of our communication strategy with you, a strategy which isdesigned to promote effective two way communication throughout the auditprocess with those charged with governance.

It summarises the planned audit strategy for the year ending 31 March 2019in respect of our audit of the financial statements of the Council andconsolidated entities (together the ‘Group’) and use of resources; comprisingmateriality, key audit risks and the planned approach to these, together withtimetable and the BDO team.

The planned audit strategy has been discussed with management to ensurethat it incorporates developments in the business during the year underreview, the results for the year to date and other required scope changes.

We look forward to discussing this plan with you at the Audit and StandardsCommittee meeting on 13 March 2019 and to receiving your input on thescope and approach.

In the meantime if you would like to discuss any aspects in advance of themeeting please contact one of the team.

Lisa Clampin

28 February 2019

WELCOMEIntroduction

Lisa ClampinAudit Partner

t: +44(0)1473 320716m: +44(0)7791 397160e: [email protected]

Francesca Palmer

Audit Manager

t: +44 (0) 1473 320 739m: +44 (0) 7970 126254e: [email protected]

INTRODUCTION

This report has been prepared solely for the use of the Audit and Standards Committee and Those Charged with Governance and should not be shown to any other person without our express permissionin writing. In preparing this report we do not accept or assume responsibility for any other purpose or to any other person. For more information on our respective responsibilities please see theappendices.

Emma Etherington

Audit Senior

t: +44(0) 1473 320802e: [email protected]

CONTENTS

Introduction

Welcome

Executive summary

Audit scope and objectives

Audit risks – Financial statements

Audit risks – Other matters

Independence

Fees

Appendices contents


This summary provides an overview of the key audit matters that we believeare important to the Audit and Standards Committee in reviewing theplanned audit strategy for the Council and the Group for the year ending 31March 2019.

It is also intended to promote effective communication and discussion and toensure that the audit strategy appropriately incorporates input from thosecharged with governance.

Audit scope

The scope of the audit is determined by the NAO’s Code of Audit Practicethat sets out what local auditors are required to do to fulfil their statutoryresponsibilities under the Local Audit and Accountability Act 2014. Thisincludes: auditing the financial statements; reviewing the arrangements tosecure value for money through the economic, efficient and effective use ofits resources; and, where appropriate, exercising the auditor’s widerreporting powers and duties.

Our approach is designed to ensure we obtain the requisite level ofassurance in accordance with applicable laws, appropriate standards andguidance issued by the NAO.

Materiality

Planning materiality for the Council and the Group will be set at 1.65% ofgross expenditure for the year using the prior year gross expenditure figure.This will be revisited when the draft financial statements are received foraudit.

Although materiality is the judgement of the engagement lead, the Audit andStandards Committee is obliged to satisfy themselves that the materialitychosen is appropriate for the scope of the audit.

SCOPE AND MATERIALITYExecutive summary

GROUPMATERIALITY

£2,707,000

CLEARLYTRIVIAL£54,100

EXECUTIVE SUMMARY

SINGLEENTITY

MATERIALITY£2,705,000

CLEARLYTRIVIAL£54,000

CONTENTS

Introduction

Executive summary

Scope and materiality

Audit strategy

Audit risk overview

Independence and fees




Independence

Fees

Appendices contents


AUDIT STRATEGYExecutive summary

Our Audit Strategy is predicated on a risk based approach, so that audit workis focused on the areas of the financial statements where the risk of materialmisstatement is assessed to be higher, or where there is a risk that theorganisation has not made proper arrangements for securing economy,efficiency and effectiveness in its use of resources.

Our starting point is to document/update our understanding of the Group,Council and other component entities’ businesses and the specific risks itfaces. We review the predecessor auditor’s prior year audit file and wediscuss with management any changes to the business and management’sown view of potential audit risk, to gain an understanding of the Group andthe Councils activities and to determine which risks impact on our audit. Wewill continue to update this assessment throughout the audit.

For the financial statements audit, we also confirm our understanding of theaccounting systems in order to ensure their adequacy as a basis for thepreparation of the financial statements, group-wide controls, consolidationprocess, and that proper accounting records have been maintained.

A lower level of materiality is applied to the areas of the financialstatements that are considered to be sensitive, such as senior managementremuneration disclosures, auditor’s remuneration disclosures and relatedparty disclosures.

We then carry out our audit procedures in response to audit risks.

The table on the next page summarises our planned approach to audit risksidentified.

CONTENTS

Introduction

Executive summary


Audit strategy

Audit risk overview





Independence

Fees

Appendices contents


AUDIT RISK OVERVIEWExecutive summary

Risk identified – Financial statementsRiskrating

Fraud riskpresent Testing approach

Impact of significantjudgements and estimates

Management override of controls Significant Yes Substantive Medium

Revenue (and expenditure) recognition Significant Yes Substantive Medium

Property, Plant & Equipment and Investment Property valuation Significant No Substantive High

Pension liability valuation Significant No Substantive High

Accounting for treatment of HTS (Property and Environmental) Limitedpension costs and liability

Significant No Substantive High

CONTENTS

Introduction

Executive summary


Audit strategy

Audit risk overview





Independence

Fees

Appendices contents


INDEPENDENCE AND FEESExecutive summary

Independence

We confirm that the firm complies with the Financial Reporting Council’s Ethical Standard for Auditors and, in ourprofessional judgement, is independent and objective within the meaning of those Standards.

Fees

2018/19

£

Code audit fees 59,686

Estimated fee for group accounts 2,500

Total audit fees 62,186

Non audit fees

- Housing Benefit Subsidy certification (1)16,825

- Pooling Housing Capital Receipts return certification 3,000

Non audit fees 19,825

Total fees 82,011

Amendments to the proposed fees

If we need to propose any amendments to the fees during the course of the audit, where our assessment of risk andcomplexity are significantly different from those reflected in the proposed fee or where we are required to carry outwork in exercising our additional powers and duties, we will first discuss this with the Council.

Where this requires a variation to the scale fee set by PSAA we will seek approval from PSAA. If necessary, we will alsoprepare a report outlining the reasons why the fee needs to change for discussion with the Audit and StandardsCommittee. At this stage we have included £2,500 as an estimated fee for group accounts, this will be revisited toreflect the actual time taken to carry out the work on group accounts.

(1) This is the agreed fee for the initial workbooks. Any additional testing (40+ or 100% reperformance) will be chargedat £850 per sample in accordance with our fee letter dated 5 September 2018.

CONTENTS

Introduction

Executive summary


Audit strategy

Audit risk overview





Independence

Fees

Appendices contents


Key components of our auditobjectives and strategy for theCouncil are highlighted andexplained on the following pages.

Audit planning is a collaborativeand continuous process and ouraudit strategy, as reflected here,will be reviewed and updated asour audit progresses.

We will communicate anysignificant changes to our auditstrategy, should the need for suchchange arise.

OVERVIEW

Reporting Objectives

Auditing standards We will perform our audit in accordance with International Standards on Auditing UK (ISAs (UK)) andrelevant guidance published by the NAO.

Financialstatements

We will express an opinion on the Council and Group financial statements, prepared in accordance withthe CIPFA Code of Practice on Local Authority Accounting 2018/19 and other directions.

Statement ofAccounts

In addition to our objectives regarding the financial statements, we will also read and consider the otherinformation contained in the Statement of Accounts to consider whether there is a materialinconsistency between the other information and the financial statements or other information and ourknowledge obtained during the audit.

Use of resources We will report whether we consider that the Council has put in place proper arrangements for securingeconomy, efficiency and effectiveness in its use of resources.

Additional powersand duties

Where necessary we may be required to: issue a report in the public interest; make a writtenrecommendation to the Council; allow local electors to raise questions and objections on the accounts;or exercise legal powers to apply to the courts for a declaration that an item of account is contrary tolaw, issue an advisory notice or an application for a judicial review.

Report to theAudit andStandardsCommittee

Prior to the approval of the financial statements, we will discuss our significant findings with the Auditand Standards Committee. We will highlight key accounting and audit issues as well as internal controlfindings and any other significant matters arising from the audit.

Audit scopeand objectives

CONTENTS

Introduction

Executive summary


Overview

Audit scope entities, componentsand audit risks

Audit timeline

BDO team



Independence

Fees

Appendices contents


A high-level overview of how we have designed the Group audit strategy is summarised below to ensure you have clear oversight of the scope of the workwe intend to perform.

This assessment is currently on-going and will be finalised on receipt of draft accounts prior to the commencement of the financial statements audit.

AUDIT SCOPE ENTITIES, COMPONENTS AND AUDIT RISKS

Entity Nature of OperationsAuditclassification

Reason forclassification

AuditRisks

ComponentMateriality Audit strategy

HTS (Property andEnvironmental) Ltd

Provision of housing repairs andmaintenance on behalf of thelocal authority.

Nonsignificantcomponent

Size N/A N/A Desktop analytical review.

CONTENTS

Introduction

Executive summary


Overview


Audit timeline

BDO team



Independence

Fees

Appendices contents


AUDIT TIMELINEAn overview of the key dates

OCT NOV DEC JAN FEB MAR APR MAY JUN JUL AUG SEP

Audit and StandardsCommittee receives

audit completionreport and approves

Statement of Accounts(31 Jul 2019)

Planning and riskassessment work

commences

(Dec 2018)

Interim auditvisit

commences(11 Feb 2019)

Final auditvisit

commences(17 Jun2019)

Audit andStandards

Committee(13 Mar 2019)

Statutorydeadline to

publishaccounts

(31 Jul 2019)

Planningmeeting with

management (4Dec 2018)

Audit andStandards

Committeereceives

annual auditletter

Draft accountssubmitted for

audit

(31 May 2019)

WGA SubmissionDeadline

(31 August2019)

CONTENTS

Introduction

Executive summary


Overview


Audit timeline

BDO team



Independence

Fees

Appendices contents


Team responsibilities

I will lead on the audit of the Council.

I work closely with Lisa to develop and execute the audit strategy. I will be a key point ofcontact on a day to day basis for the Council and will ensure that timelines are carefullymanaged to ensure that deadlines are met and matters to be communicated to Managementand the Audit and Standards Committee are highlighted on a timely basis.

Francesca PalmerAudit Managert: +44 (0)1473 320739m: +44(0)7970 126254e: [email protected]

BDO TEAM

As the engagement lead I have primary responsibility to ensure that the appropriateaudit opinion is given. In meeting this responsibility I ensure that the audit has resultedin obtaining sufficient and appropriate evidence to provide reasonable, but notabsolute, assurance that the financial statements are free from material misstatement,whether due to fraud or error, and to report on the financial statements andcommunicate as required by the ISAs (UK), in accordance with our findings.

I am responsible for the overall quality of the engagement and am supported by the restof the team as set out here.



Emma EtheringtonAudit Senior

t: +44(0) 1473 320802e: [email protected]

I will be responsible for the day-to-day supervision of the audit team, and will beresponsible for the delivery of the key audit work.

CONTENTS

Introduction

Executive summary


Overview


Audit timeline

BDO team



Independence

Fees

Appendices contents


We have assessed the following as financial statements audit risks. These are matters assessed as most likely to cause a material misstatement in the financialstatements and include those that will have the greatest effect on audit strategy, the allocation of audit resources and the amount of audit focus by theengagement team.

OVERVIEW

Description of riskSignificantrisk

Normalrisk Overview of risk

1. Management override ofcontrols

ISA (UK) 240 presumes that management is in a unique position to perpetrate fraud because of theirability to manipulate accounting records and prepare fraudulent financial statements by overridingcontrols that otherwise appear to be operating effectively.

2. Revenue (andexpenditure) recognition

Auditing standards presumes that revenue recognition presents a fraud risk. This risk is in respect ofthe existence (recognition) of revenue and capital grants that are subject to performanceconditions before these may be recognised as revenue in the comprehensive income andexpenditure statement (CIES) and fees and charges.

There is also a risk of manipulation of expenditure recognition by inappropriately deferringexpenditure to the following year.

3. Property, Plant &Equipment and InvestmentProperty valuation

There is a risk over the valuation of land, buildings, dwellings and investment properties wherevaluations are based on assumptions or where updated valuations have not been provided for a classof assets at year-end.

4. Pension liabilityvaluation

There is a risk the valuation is not based on appropriate membership data where there aresignificant changes or uses inappropriate assumptions to value the liability.

5. Treatment of HTSpension costs and liability

A number of changes to the accounting treatment for HTS’s Pensions costs and liability were madea result of the prior year audit. The previous auditors had recommended that the tripartiteagreement was changed to reflect the pooled nature of the funds however this has not happenedand therefore this increases the risk of the Council acting or accounting for the transactionsincorrectly.

Audit risks –Financialstatements

CONTENTS

Introduction

Executive summary



Overview

Management override of controls

Revenue (and Expenditure)recognition

Property, Plant & Equipment andinvestment property valuation

Pension liability valuation

HTS Pension Costs and liabilityTreatment


Independence

Fees

Appendices contents


MANAGEMENT OVERRIDE OF CONTROLS

ISA (UK) 240 presumesthat management is ina unique position toperpetrate fraud.

Significant risk

Normal risk

Fraud risk

Assess design &implementation of controlsto mitigate

Significant Managementestimates & judgements

Controls testingapproach

Substantive testingapproach

Risk highlighted by Council

Risk detail

ISA (UK) 240 - The auditor’s responsibilities relating tofraud in an audit of financial statements requires us topresume that the risk of management override of controlsis present and significant in all entities.

Planned audit approach

Our audit procedures will include the following:

• Review and verification of journal entries made in theyear, agreeing the journals to supportingdocumentation. We will determine key riskcharacteristics to filter the population of journals. Wewill use our IT team to assist with the journalextraction;

• Review of estimates and judgements applied bymanagement in the financial statements to assesstheir appropriateness and the existence of anysystematic bias; and

• Review of unadjusted audit differences for indicationsof bias or deliberate misstatement.

CONTENTS

Introduction

Executive summary



Overview







Independence

Fees

Appendices contents


Risk detail

We consider there to be a significant risk in respect of the existence (recognition) of revenue and capital grants thatare subject to performance conditions before these may be recognised as revenue in the comprehensive income andexpenditure statement (CIES) and fees and charges.

In the public sector the risk of fraud in revenue recognition is modified by Practice Note 10 issued by the FinancialReporting Council. This states that auditors should also consider the risk that material misstatements may occurthrough the manipulation of expenditure recognition. This risk is identified as being relevant to cut-off ofexpenditure, where testing will be focussed.



• Test an increased sample of grants included in income to documentation from grant paying bodies and checkwhether recognition criteria have been met; and

• Test an increased sample of fees and charges to ensure they have been recorded in the correct period and toensure that all income that should have been recorded has been recognised.

• Test an increased sample of expenditure either side of year end, to confirm that expenditure has been recordedin the correct period and that all expenditure that should have been recorded at year end has been.

Under auditingstandards there is apresumption thatincome recognitionpresents a fraud risk.

Significant risk

Normal risk

Fraud risk






REVENUE (AND EXPENDITURE) RECOGNITION

CONTENTS

Introduction

Executive summary



Overview







Independence

Fees

Appendices contents


Risk detail

Local authorities are required to ensure that the carrying value of property, plant and equipment (PPE) is notmaterially different to the current value or fair value (as applicable) at the balance sheet date. PPE values aresubject to valuation changes and material judgemental inputs and estimation techniques.

The Code requires management to carry out a full valuation of its land and buildings on a periodic basis (at leastevery 5 years). In the intervening years, management is required to assess whether there has been a material changein the value of its assets that should be accounted for.

As part of the 5 year rolling re-valuation programme, approximately 20% of the land and buildings assets have beenre-valued in 2018/19.

The Council uses an external valuer to perform the valuation assessment.



• Review the instructions provided to the valuer and review the valuer’s skills and expertise in order to determineif we can rely on the management expert;

• Confirm that the basis of valuation for assets valued in year is appropriate based on their usage;

• Review accuracy and completeness of asset information provided to the valuer such as rental agreements andsizes;

• Review assumptions used by the valuer and movements against relevant indices for similar classes of assets andfollow up valuation movements that appear unusual;

• Review the basis for the approach to calculation of useful economic life for housing assets given the recentchange in valuer and approach; and

• Confirm that PPE not specifically revalued in the year have been assessed to ensure their reported values remainmaterially accurate.

There is a risk over thevaluation of land,buildings, dwellings andinvestment propertieswhere valuations arebased on significantassumptions.

Significant risk

Normal risk

Fraud risk






PROPERTY, PLANT & EQUIPMENT AND INVESTMENT PROPERTYVALUATION

CONTENTS

Introduction

Executive summary



Overview







Independence

Fees

Appendices contents


Risk detail

The net pension liability comprises the Council’s share of the market value of assets held in the pension fund and theestimated future liability to pay pensions.

An actuarial estimate of the liability is calculated by an independent firm of actuaries. The estimate is based on theroll forward of membership data from the 2016 triennial valuation exercise, updated at 31 March 2019 for factorssuch as mortality rates and expected pay rises along with other assumptions around inflation when calculating theliability. There is a risk the valuation is not based on appropriate membership data where there are significantchanges or uses inappropriate assumptions to value the liability.



• Agree the disclosures to the information provided by the pension fund actuary;

• Review the competence of the management expert (actuary);

• Review the reasonableness of the assumptions used in the calculation against other local government actuariesand other observable data;

• Review the controls for providing accurate membership data to the actuary;

• Contact the administering authority and request confirmation of the controls in place for providing accuratemembership data to the actuary and testing of that data; and

• Check that any significant changes in membership data have been communicated to the actuary.

There is a risk themembership data andcash flows used by theactuary in the roll-forward valuation maynot be correct, or thevaluation usesinappropriateassumptions to valuethe liability.

Significant risk

Normal risk

Fraud risk






PENSION LIABILITY VALUATION

CONTENTS

Introduction

Executive summary



Overview







Independence

Fees

Appendices contents


Risk detail

HTS was consolidated into the Council’s accounts for the first time last year. The Council have agreed with HTS thatit will pay any employer contributions above 14.1% for transferred employees and 10.6% for ex Keir employees. Inaddition, the Council has guaranteed that any termination liability will remain the responsibility of the Council whenHTS’s participation in the LGPS scheme finishes. Upon review of the prior year draft accounts the previous auditorsconcluded that the approach taken was incorrect and requested a number of amendments to both the accounts andthe tripartite agreement to reflect the pooling of the funds that is in place. The Accounts were amended and anunmodified true and fair opinion was given. However the Pension fund administrating body has declined to amendthe tripartite agreement. Therefore there remains a risk that the accounting is not in line with the agreement orthat the Council is inappropriately accounting for the costs and liabilities relating to HTS’s share of the Pension fundcosts and liability in its single entity accounts.



• Review of the arrangements in place and proposed accounting treatment to confirm that the accountingtreatment is in line with the agreement and proper practices and that the Council’s accounting for the costs ofHTS in the single entity accounts is appropriate and materially accurate.

A number of changes tothe accountingtreatment for HTS’sPensions costs andliability were made aresult of the prior yearaudit. It wasrecommended that thetripartite agreementwas amended howeverthis has not happened.

Significant risk

Normal risk

Fraud risk






HTS PENSION COSTS AND LIABILITY TREATMENT

CONTENTS

Introduction

Executive summary



Overview







Independence

Fees

Appendices contents


Fraud

Whilst the Audit and Standards Committee as those charged withgovernance have ultimate responsibility for prevention and detection offraud, we are required to obtain reasonable assurance that the financialstatements are free from material misstatement, including those arising as aresult of fraud. Our audit approach includes the consideration of fraudthroughout the audit and includes making enquiries of management andthose charged with governance.

We have not been made aware of any actual alleged or suspected incidencesof fraud. We request confirmation from the Audit and Standards Committeeon fraud and a discussion on the controls and processes in place to ensuretimely identification and action.

Predecessor auditors

We will review the work performed by the predecessor auditor. We willperform additional audit procedures on the comparatives if we conclude thatsufficient reliance can not be placed on the predecessor auditor’s work.

Significant estimates

We will report to you on significant estimates.

We will seek to understand and perform audit testing procedures onaccounting estimates and judgements including consideration of the outcomeof historic judgements and estimates. We will report to you ourconsideration of whether Management estimates and judgements are withinan acceptable range.

Internal audit

We will ensure that we maximise the benefit of the overall audit effortcarried out by internal audit and ourselves, whilst retaining the necessaryindependence of view.

We plan to review the audit work of the Group’s internal audit function andanticipate that we will be able to place reliance on their work in respect oftheir assessment of some control processes. If as a result of our review, weconclude that reliance is not possible, we will report this to you and alsoperform alternative procedures.

Laws and regulations

We will consider compliance with laws and regulations. These include VATlegislation and Employment Taxes. We will make enquiries of Managementand review correspondence with the relevant authorities. Specialist teamswithin BDO will review VAT and employment tax compliance.

Accounting policies

We will report to you on significant qualitative aspects of your chosenaccounting policies. We will consider the consistency and application of thepolicies and we will report to you where accounting policies are inconsistentwith the CIPFA code under the circumstances.

Financial statement disclosures

We will report to you on the sufficiency and content of your financialstatement disclosures.

Any other matters

We will report to you on any other matters relevant to the overseeing of thefinancial reporting process. Where applicable this includes why we considera significant accounting practice that is acceptable under the financialreporting framework not to be the most appropriate.

OTHER MATTERS REQUIRING FURTHER DISCUSSIONAudit risks –Other matters

CONTENTS

Introduction

Executive summary




Other matters requiring furtherdiscussion

Changes to accounting standards

IT general controls

Independence

Fees

Appendices contents


CHANGES TO ACCOUNTING STANDARDSClassification and measurement of financial instruments (IFRS 9)

• IFRS 9 financial instruments has been implemented for 2018/19 and requires all relevant financial instrument assets (principally investments and loansprovided to others) and liabilities (principally borrowing) to be categorised under new criteria based on their business model and contractual cashflows that will determine their classification and basis of valuation.

• CIPFA has published guidance to assist with the required review and any restatement required where the classification needs to be amended. Ourinitial discussions in respect of investments and borrowings suggest that there are unlikely to be material restatements required for the Council.

• The Council will need to undertake a review of all relevant assets and liabilities to determine the appropriate classification in the financialstatements. This will need to include both the Council and component entities in the Group financial statements with particular focus on thosecomponents who report under UK GAAP, rather than IFRS, as this new accounting standard has not yet been adopted into UK GAAP. There is a riskthat relevant financial assets and liabilities are not classified and measured in accordance with the new accounting standard. There is also the riskthat components who report under UK GAAP may be consolidated into the Group financial statements without the required adjustments to ensure theGroup financial statements comply with the requirement of the new standard.

Revenue from contracts with customers (IFRS 15)

• IFRS 15 revenue from contracts with customers has been implemented for 2018/19 and requires all relevant revenue streams to be reviewed under anew ‘5-step model’ to determine the appropriate point at which revenue can be recognised.

• CIPFA has published guidance to assist with the required review including what revenue falls within IFRS 15 or IPSAS 23 revenue from non-exchangetransactions, and the process for determining the correct recognition points and amounts for revenue. Our initial review of revenue streams for localauthorities suggests that there are unlikely to be material restatements required for the Council.

• The Council will need to undertake a review of all relevant revenue streams to determine the appropriate recognition date and amounts in thefinancial statements. This will need to include both the Council and component entities in the Group financial statements with particular focus onthose components who report under UK GAAP, rather than IFRS, as this new accounting standard has not yet been adopted into UK GAAP. There is arisk that relevant revenue streams are not recognised in the financial statements in accordance with the new standard. There is also the risk thatcomponents who report under UK GAAP may be consolidated into the Group financial statements without the required adjustments to ensure theGroup financial statements comply with the requirement of the new standard.

Impact on our audit

• From our initial considerations it seems unlikely that these changes will lead to a material restatement for the Council, as the projected impact isimmaterial this has not been considered as a risk for the purpose of our audit, but substantive testing will be carried out over the disclosures to ensurethat they satisfy the requirements.

CONTENTS

Introduction

Executive summary






IT general controls

Independence

Fees

Appendices contents


IT General Controls (ITGCs) are the policies and procedures that relate tomany IT applications and support the effective functioning of applicationcontrols by helping to ensure the continued proper operation of informationsystems. They commonly include controls over data centre and networkoperations; system software acquisition, change and maintenance; accesssecurity; and application system acquisition, development, andmaintenance.

ITGCs are an important component in systems of internal control, andsometimes have a direct impact on the reliability of other controls.

IT assurance is embedded in our audit strategy to ensure the IT systemsprovide a suitable platform for the control environment and is undertaken inconjunction with our IT Assurance team. Our testing strategy includes atailored range of data analytics, system configuration and IT environmenttesting.

IT GENERAL CONTROLS

CONTENTS

Introduction

Executive summary






IT general controls

Independence

Fees

Appendices contents


We have embedded the requirements of the Standardsin our methodologies, tools and internal trainingprogrammes. Our internal procedures require thataudit engagement partners are made aware of anymatters which may reasonably be thought to bear onthe integrity, objectivity or independence of the firm,the members of the engagement team or others whoare in a position to influence the outcome of theengagement. This document considers such matters inthe context of our audit for the year ending 31 March2019.

We have not identified any relationships or threats thatmay reasonably be thought to bear on our objectivityand independence.

Details of rotation arrangements for key members ofthe audit team and others involved in the engagementare set out in the appendices.

We confirm that the firm, the engagement team andother partners, directors, senior managers andmanagers conducting the audit comply with relevantethical requirements including the FRC’s EthicalStandard and are independent of the Council and theGroup.

We also confirm that we have obtained confirmationthat external audit experts involved in the auditcomply with relevant ethical requirements includingthe FRC’s Ethical Standard and are independent of theCouncil and the Group.

Should you have any comments or queries regardingany independence matters we would welcome theirdiscussion in more detail.

Non-audit services

We are planning to provide non audit services inrelation to the certification of Housing Benefit subsidyand Pooled Housing Capital Receipts. The fees for thiswork are included within the fees schedule on page 7.

Under ISAs (UK) and theFRC’s Ethical Standardwe are required, asauditors, to confirmour independence.

INDEPENDENCEIndependence

CONTENTS

Introduction

Executive summary




Independence

Independence

Fees

Appendices contents


Fees summary for year ending 31 March 2019

SUMMARYFees

2018/19 £

Code audit fees 59,686

Estimated fee for group accounts 2,500

Total audit fees 62,186

Non audit fees

- Housing Benefit Subsidy certification 16,825

- Pooling Housing Capital Receipts return certification 3,000

Non audit fees 19,825

Total fees 82,011

CONTENTS

Introduction

Executive summary




Independence

Fees

Summary

Appendices contents

A Responsibilities 24

Council’s responsibilities 24

Our responsibilities 25

Communication with you 26

B Independence 27

Team Member rotation 27

APPENDICES CONTENTS

C Materiality 28

Materiality: Definition and application 28

Materiality: Definition and application 29

D Audit quality 30

Audit quality 30


The Council’s Responsibilities and ReportingCOUNCIL’S RESPONSIBILITIES

Financial reporting

The Council is expected to have effective governance arrangements todeliver its objectives. To this end, the publication of the financialstatements is an essential means by which the Council accounts for itsstewardship and use of the public money at its disposal.

The form and content of the Council’s financial statements, and anyadditional schedules or returns for consolidation purposes, should reflect therequirements of the relevant accounting and reporting framework in placeand any applicable accounting standards or other direction under thecircumstances.

The Council is also required to prepare schedules or returns to facilitate thepreparation of consolidated accounts such as HM Treasury’s Whole ofGovernment Accounts.

The Section 151 Officer is responsible for preparing and filing a Statement ofAccounts and financial statements which show a true and fair view inaccordance with CIPFA Code of Practice on Local Authority Accounting2018/19, applicable accounting standards or other direction under thecircumstances.

Our audit of the financial statements does not relieve management nor thosecharged with governance of their responsibilities for the preparation ofmaterially accurate financial statements.

Use of resources

Councils are required to maintain an effective system of internal controlthat supports the achievement of their policies, aims and objectives whilesafeguarding and securing value for money from the public funds and otherresources at their disposal.

As part of the material published with its financial statements, the Council isrequired to bring together commentary on its governance framework andhow this has operated during the period in a governance statement.

In preparing its governance statement, the Council will tailor the content toreflect its own individual circumstances, consistent with the requirements ofthe relevant accounting and reporting framework and having regard to anyguidance issued in support of that framework. This includes a requirement toprovide commentary on their arrangements for securing value for moneyfrom their use of resources.

Responsibilities

CONTENTS

Appendices contents

Responsibilities

Our responsibilities

Communication with you

Independence

Materiality

Materiality: Definition andapplication

Audit quality


Our responsibilities and reporting – financial statements

We are responsible for performing our audit under International Standards onAuditing (UK) to form and express an opinion on your consolidated and theCouncil’s financial statements. We report our opinion on the financialstatements to the members of the Council.

We read and consider the ‘other information’ contained in the Annual Reportsuch as the additional narrative reports. We will consider whether there is amaterial inconsistency between the other information and the financialstatements or other information and our knowledge obtained during theaudit.

Our responsibilities and reporting – use of resources

We are required to satisfy ourselves that the Council has made properarrangements for securing economy, efficiency and effectiveness in its use ofresources.

This means that we have regard to relevant guidance issued by the NAO andundertake sufficient work to be able to satisfy ourselves as to whether theCouncil has put arrangements in place that support the achievement of valuefor money.

What we don’t report

Our audit is not designed to identify all matters that may be relevant to theCouncil and the Audit and Standards Committee and cannot be expected toidentify all matters that may be of interest to you and, as a result, thematters reported may not be the only ones which exist.

Responsibilities and reportingOUR RESPONSIBILITIES

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Independence

Materiality


Audit quality


Those charged with governance

References in this report to Those Charged With Governance are to theCouncil as a whole. For the purposes of our communication with thosecharged with governance you have agreed we will communicate primarilywith the Audit and Standards Committee.

In communicating with Audit and Standards Committee, representing ThoseCharged With Governance of the Council and the Group, we consider ThoseCharged With Governance of subsidiary entities to be informed aboutmatters relevant to their subsidiary. Please let us know if this is notappropriate.

Communication, Meetings and Feedback

We request feedback from you on our planning and completion report topromote two way communication throughout the audit process and to ensurethat all risks are identified and considered; and at completion that theresults of the audit are appropriately considered. We will meet withmanagement throughout the audit process. We will issue regular updates anddrive the audit process with clear and timely communication, bringing in theright resource and experience to ensure efficient and timely resolution ofissues.

Planning Report

The Planning Report sets out all planning matters which we want to draw toyour attention including audit scope, our assessment of audit risks andmateriality.

Internal Controls

We will consider internal controls relevant to the preparation of financialstatements in order to design our audit procedures and complete our work.This is not for the purpose of expressing an opinion on the effectiveness ofinternal control.

Audit Completion Report

At the conclusion of the audit, we will issue an Audit Completion Report tocommunicate to you key audit findings before concluding our audit opinion.We will include any significant deficiencies in internal controls which weidentify as a result of performing audit procedures. We will meet with you todiscuss the findings and in particular to receive your input on areas of thefinancial statements involving significant estimates and judgements andcritical accounting policies.

Once we have discussed the contents of the Audit Completion Report withyou and having resolved all outstanding matters we will issue a final versionof the Report.

COMMUNICATION WITH YOU

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Senior teammembers

Numberof yearsinvolved Rotation to take place before


1 5 years

Francesca PalmerAudit Manager

1 7 years

These tables indicate the latest rotation periods normally permitted underthe independence rules for the terms of appointment by PSAA.

In order to safeguard audit quality we will employ a policy of gradualrotation covering the team members below as well as other senior membersof the engagement team to ensure a certain level of continuity from year toyear.

Independence - engagement team rotation

TEAM MEMBER ROTATIONIndependence

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Concept and definition

The concept of materiality is fundamental to the preparation of the financialstatements and the audit process and applies not only to monetarymisstatements but also to disclosure requirements and adherence toappropriate accounting principles and statutory requirements.

We apply the concept of materiality both in planning and performing ouraudit, and in evaluating the effect of misstatements. For planning, weconsider materiality to be the magnitude by which misstatements, includingomissions, could influence the economic decisions of reasonable users thatare taken on the basis of the financial statements. In order to reduce to anappropriately low level the probability that any misstatements exceedmateriality, we use a lower materiality level, performance materiality, todetermine the extent of testing needed. Importantly, misstatements belowthese levels will not necessarily be evaluated as immaterial as we also takeaccount of the nature of identified misstatements, and the particularcircumstances of their occurrence, when evaluating their effect on thefinancial statements as a whole.

Materiality therefore has qualitative as well as quantitative aspects and anitem may be considered material, irrespective of its size, if it has an impacton (for example):

• Narrative disclosure e.g. accounting policies, going concern

• Instances when greater precision is required (e.g. senior managersremuneration and related party transactions).

International Standards on Auditing (UK) also allow the auditor to set a lowerlevel of materiality for particular classes of transaction, account balances ordisclosures for which misstatements of lesser amounts than materiality forthe financial statements as a whole could reasonably be expected toinfluence the economic decisions of users taken on the basis of the financialstatements.

Calculation and determination

We have determined materiality based on professional judgement in thecontext of our knowledge of the entity, including consideration of factorssuch as industry developments, financial stability and reporting requirementsfor the financial statements.

We determine materiality in order to:

• Assist in establishing the scope of our audit engagement and audit tests

• Calculate sample sizes

• Assist in evaluating the effect of known and likely misstatements on theGroup financial statements.

Reassessment of materiality

We will reconsider materiality if, during the course of our audit engagement,we become aware of facts and circumstances that would have caused us tomake a different determination of planning materiality if we had beenaware.

Further, when we have performed all our tests and are ready to evaluate theresults of those tests (including any misstatements we detected) we willreconsider whether materiality combined with the nature, timing and extentof our auditing procedures, provided a sufficient audit scope.

MATERIALITY: DEFINITION AND APPLICATIONMATERIALITYMateriality

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MATERIALITY: DEFINITION AND APPLICATION

If we conclude that our audit scope was sufficient, we will use materiality toevaluate whether uncorrected misstatements (individually or in aggregate)are material.

You should be aware that any misstatements that we identify during ouraudit, both corrected and uncorrected errors, might result in additionalaudit procedures being necessary.

Unadjusted errors

We will communicate to you all uncorrected misstatements identified duringour audit, other than those which we believe are ‘clearly trivial’.

Clearly trivial is defined as matters which will be of a wholly different(smaller) order of magnitude than the materiality thresholds used in theaudit, and will be matters that are clearly inconsequential, whether takenindividually or in aggregate.

We will obtain written representations from the Audit and StandardsCommittee confirming that in their opinion these uncorrected misstatementsare immaterial, both individually and in aggregate and that, in the contextof the financial statements taken as a whole, no adjustments are required.

We will request that you correct all uncorrected misstatements. In particularwe would strongly recommend correction of errors whose correction wouldaffect compliance contractual obligations or governmental regulations.Where you choose not to correct all identified misstatements we will requesta written representation from you setting out your reasons for not doing soand confirming that in your view the effects of any uncorrectedmisstatements are immaterial, individually and in aggregate, to the financialstatements as whole.

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Audit quality


BDO’s audit quality cornerstones underpin the firm’s definition of auditquality.

BDO is committed to audit quality. It is a standing item on the agenda of theLeadership Team, who in conjunction with the Audit Stream Executive,monitors the actions required to maintain a high level of audit quality withinthe audit stream and address findings from external and internal inspections.We welcome feedback from external bodies and are committed toimplementing necessary actions to address their findings.

We recognise the importance of continually seeking to improve audit qualityand enhancing certain areas. Alongside reviews from a number of externalregulators, the firm undertakes a thorough annual internal Audit QualityAssurance Review and as a member firm of BDO International network weare also subject to a quality review visit every three years. We have alsoimplemented additional quality control review processes for all listed andpublic interest entities.

More details can be found in our Transparency Report at www.bdo.co.uk

• Audit reports

• Management letter• Audit Committee Reports

• Top quality financialstatement.

HIGH QUALITYAUDIT OUTPUTS

• How to assess– benchmarking

• Where to focus– risk-based approach

• How to test – audit strategy

• What to test – materiality andscope.

DILIGENT PROFESSIONALJUDGEMENTS

KNOWLEDGEABLE,SKILLED PEOPLE

• Knowledge of the business• Intelligent application

of auditing standards

• Intelligent applicationof accounting

standards• Understanding of

the controlenvironment.

MINDSET• Scepticism• Independent

• Focus on theshareholder as user

• Robustness andmoral courage.

AUDIT QUALITYCORNERSTONES

AUDIT QUALITYAUDIT QUALITYAudit quality

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FOR MORE INFORMATION: The matters raised in our report prepared in connection with the audit are those webelieve should be brought to your attention. They do not purport to be a complete recordof all matters arising. This report is prepared solely for the use of the organisation andmay not be quoted nor copied without our prior written consent. No responsibility to anythird party is accepted.

BDO is an award winning UK member firm of BDO International, the world’s fifth largestaccountancy network, with more than 1,500 offices in over 160 countries.

BDO LLP is a corporate establishment under the Limited Liability Partnership Act 2000 anda UK Member Firm of BDO International. BDO Northern Ireland, a separate partnership,operates under a licence agreement. BDO LLP and BDO Northern Ireland are bothseparately authorised and regulated by the Financial Conduct Authority to conductinvestment business.

© 2019 BDO LLP. All rights reserved.

www.bdo.co.uk

Lisa Clampin


Documents

Report to the Audit and Standards Committee HARLOW COUNCIL